Operation of Force Majeure in an Epidemic

The COVID-19 Coronavirus is already disrupting both public life and business across the globe as various countries, including China, take robust measures to contain its spread. All engaged in international business should consider the legal ramifications this may have on their activities. Although much will depend on the specific provisions of relevant contracts and the available rights and remedies under the applicable law, the first port of call will usually be the contractual "force majeure" clause.

This update provides an overview of how a "force majeure" clause generally functions, using English law as a basis for analysis, and then highlights further considerations which may be relevant in the context of construction contracts (including Build Operate Transfer (BOT) and Engineering, Procurement and Construction (EPC) agreements) and energy or mineral resources contracts (including concession agreements and power purchase agreements) which may be particularly affected along the Belt and Road.

Force Majeure Clauses

A "force majeure" clause generally allows a party relief if a "force majeure" event materially impacts, or renders impossible, the performance of the contract. This relief is usually the suspension of the parties' obligations under the contract during the "force majeure" event, and, if the event continues for a certain period of time, the right to terminate the contract.

In order to obtain this relief a party will usually need to:

prove that the event that has materially impacted, or rendered impossible, the performance of the contract, falls within the definition of "force majeure"; and

comply with any notice provisions, or other preconditions (e.g. taking steps to mitigate its losses), specified by the "force majeure" clause.

To maximise the chance of obtaining relief under a "force majeure" clause, parties should consider both the direct impact the coronavirus may have had on their contract as an epidemic, as well as the effect of the numerous government actions (including travel restrictions, quarantines, and increased border checks). Parties should compile as much evidence as possible on the effects of these events, and further consider:

making reference to the declaration by the World Health Organisation on 31 January 2020 that the coronavirus constitutes a "public health emergency of international concern"; and

if the party is based in China, applying for a "force majeure" certificate from the China Council for the Promotion of International Trade.

While the evidential weight of these official declarations is currently unclear, and will, in any event, depend on the individual facts and circumstances, and applicable law, they are likely to assist in proving that a "force majeure" event has occurred.

Should a contract not contain a "force majeure" clause (or something similar), parties may seek to rely on the doctrine of "frustration". However, "frustration" will only be available in limited circumstances where performance of the contract has become truly impossible, or where there has been a change of circumstances so fundamental that it would be unjust to hold the parties to their original agreement. Where a contract is frustrated, the contract will terminate and the parties will be released from all future obligations.

Projects on the Belt and Road

The effects of the coronavirus are already being felt on projects along the Belt and Road. One example is the China-Pakistan Economic Corridor, where certain projects were delayed or temporarily halted in late January 2020, with Chinese workers undergoing extensive screening. In addition, many Chinese factories have been disrupted by the coronavirus, affecting a wide variety of global supply chains.

Where these sorts of events affect construction (including BOT and EPC), energy or natural resources contracts along the Belt and Road, analysis on "force majeure" clauses above will likely be applicable, as many of these types of contracts contain such clauses. As above, it is important to review the specific contractual provisions carefully to determine whether the effects associated with the coronavirus fall within the relevant "force majeure" clause, and whether there are any other requirements that need to be fulfilled (e.g. notice requirements, requirements to mitigate losses etc.).

However, it is important to also consider whether the effects associated with the coronavirus may trigger any other contractual provisions, for example:

provisions entitling a party to claim extensions of time (e.g. to the project programme, or to the Commercial Operation Date (COD)) or additional money.

the provisions of any relevant insurance, which may cover losses caused by the effects of the coronavirus.

any "fluctuations" provision which may provide entitlement to claim additional costs due to the wider effects of the coronavirus on the price-sensitive elements of the contract price.

Each of these provisions may have their own notice provisions and procedures that will need to be complied with, but may offer parties additional remedies or ways to protect themselves against the risks of the ongoing epidemic. Parties should also be mindful of any provisions in any related investment agreements that may be triggered by any changes to the project (e.g. extensions of time or to the COD) which may require approvals or notifications.

Where a contract is with a state or state-owned entity, parties may wish to consider whether there is an applicable Bilateral Investment Treaty or other trade agreement that may provide relief (e.g. through a "fair and equitable treatment" clause or a "most favoured nation" clause).

Conclusion

The impact of the coronavirus on international business invokes a range of complex issues including those surrounding the applicability of "force majeure" clauses. Such issues are, however, not unprecedented. Mayer Brown has experience in advising on complex issues in global projects, and on previous epidemics such as SARS. To navigate the effects of the coronavirus on their international business, parties are advised to seek advice on their legal rights and obligations that is both global in scope and specialist in focus.

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